NOTE 13 – INCOME TAXES

The Company utilizes the asset and liability method of accounting for income taxes in accordance with FASB ASC 740-10.

(a) United States

Gulf Resources, Inc. is subject to the United States of America Tax law at tax rate of 34%. No provision for the US federal income taxes has been made as the Company had no US taxable income for the three-month and six-month periods ended June 30, 2012 and 2011, and management believes that its earnings are permanently invested in the PRC.

(b) BVI

Upper Class Group Limited, a subsidiary of Gulf Resources, Inc., was incorporated in the BVI and, under the current laws of the BVI, it is not subject to tax on income or capital gain in the BVI. Upper Class Group Limited did not generate assessable profit for the three-month and six-month periods ended June 30, 2012 and 2011.

Hong Kong Jiaxing Industrial Limited, a subsidiary of Upper Class Group Limited, was incorporated in Hong Kong and is subject to Hong Kong profits tax. The Company is subject to Hong Kong taxation on its activities conducted in Hong Kong and income arising in or derived from Hong Kong. No provision for profits tax has been made as the Company has no assessable income for the three-month and six-month periods ended June 30, 2012 and 2011. The applicable statutory tax rates for the three-month and six-month periods ended June 30, 2012 and 2011 are 16.5%.

(d) PRC

Enterprise income tax (“EIT”) for SCHC and SYCI in the PRC is charged at 25% of the assessable profits.

The operating subsidiaries SCHC and SYCI are wholly foreign-owned enterprises (“FIE”) incorporated in the PRC and are subject to PRC Foreign Enterprise Income Tax Law.

On February 22, 2008, the Ministry of Finance (“MOF”) and the State Administration of Taxation (“SAT”) jointly issued Cai Shui [2008] Circular 1 (“Circular 1”). According to Article 4 of Circular 1, distributions of accumulated profits earned by a FIE prior to January 1, 2008 to foreign investor(s) in 2008 will be exempted from withholding tax (“WHT”) while distribution of the profit earned by an FIE after January 1, 2008 to its foreign investor(s) shall be subject to WHT at 5% effective tax rate.

As of June 30, 2012 and December 31, 2011, the accumulated distributable earnings under the Generally Accepted Accounting Principles (GAAP”) of PRC are $189,972,832 and $180,939,187, respectively. Since the Company intends to reinvest its earnings to further expand its businesses in mainland China, its foreign invested enterprises do not intend to declare dividends to their immediate foreign holding companies in the foreseeable future. Accordingly, as of June 30, 2012 and December 31, 2011, the Company has not recorded any WHT on the cumulative amount of distributable retained earnings of its foreign invested enterprises in China. As of June 30, 2012 and December 31, 2011, the unrecognized WHT are $8,421,768 and $7,965,999, respectively.

The components of the provision for income taxes from continuing operations are:

	Three-Month Period Ended June 30,					Six-Month Period Ended June 30,
	2012		2011			2012		2011
Current taxes – PRC	$	1,892,567	$	5,285,957		$	3,148,833	$	11,211,191
Deferred taxes – PRC		82,622		(1,933,612	)		160,826		(1,925,724	)
	$	1,975,189	$	3,352,345		$	3,309,659	$	9,285,467

The effective income tax expenses differ from the PRC statutory income tax rate of 25% from continuing operations in the PRC as follows:

	Three-Month Period Ended June 30,						Six-Month Period Ended June 30,
Reconciliations	2012			2011			2012			2011
Statutory income tax rate		25	%		25	%		25	%		25	%
US federal net operating loss		1	%		0	%		2	%		3	%
Effective tax rate		26	%		25	%		27	%		28	%

Significant components of the Company’s deferred tax assets and liabilities at June 30, 2012 and December 30, 2011 are as follows:

	June 30,			December 31,
	2012			2011
Deferred tax liabilities	$	-		$	-

Deferred tax assets:
Allowance for obsolete and slow-moving inventories	$	3,704		$	3,718
Impairment on property, plant and equipment		636,615			639,031
Exploration costs		1,780,714			1,797,391
Repair and maintenance costs		101,879			224,984
Property, plant and equipment		68,523			81,060
Property, plant and equipment under capital leases		(23,989	)		(8,001	)
US federal net operating loss		10,442,134			10,111,821
Total deferred tax assets		13,009,580			12,850,004
Valuation allowance		(10,442,134	)		(10,111,821	)
Net deferred tax asset	$	2,567,446		$	2,738,183

Current deferred tax asset	$	105,583		$	228,702
Long-term deferred tax asset	$	2,461,863		$	2,509,481

The increase in valuation allowance for each of the three-month periods ended June 30, 2012 and 2011 is $106,382 and $36,752, respectively, and six-month periods ended June 30, 2012 and 2011 is $330,313 and $1,196,983, respectively.

There was no unrecognized tax benefits and accrual for uncertain tax positions as of June 30, 2012 and December 31, 2011.